Merlin, Inc.

The two EV lines are the report in miniature: −$4M on the screen, ~$228M once the preferred's accrued claim is counted. With no earnings to capitalize, forward price-to-sales is the only multiple that means anything, and at 8.6x FY2027E consensus sales on market cap (~10.9x on claims-adjusted EV) the stock already discounts a ramp that 2026 has not begun.

MRLN began trading on Mar 17 after closing its merger with Inflection Point Acquisition Corp. IV, set a closing high of $16.09 on Apr 16 (intraday high $17.00) and is down 88.9% since. Supply and financing wrote the path more than operations did. The stock fell 25.4% on Apr 29, when Merlin announced an $80.0M PIPE of 8.0M shares and 4.0M warrants that cut the preferred's conversion price from $12.00 to $6.67. It rose 19.8% on Jun 5 after the C-130J critical design review, fell 14.9% on Aug 14 as the Q2 miss sank in, and fell 27.5% on Sep 16 on 11.9M shares, the day the six-month lock-ups ended. That day First Round Capital's funds distributed 11.7M shares to their partners and the SPAC sponsor distributed 8.3M shares of founder shares to its members.

The $1.78 close on Sep 29 sits below the 20-day ($2.50) and 50-day ($3.22) averages, with a 14-day RSI of 29.9 and a closing low of $1.75 on Sep 28 (intraday low $1.70 on Sep 24). Short sellers saw the unlock coming: short interest rose from 1.0M shares at Mar 31 to 10.5M shares by Sep 15.

Screens compute enterprise value as market cap less cash, so MRLN shows up as a company trading below its cash: $179.9M against $183.9M at Jun 30, a screen EV of −$4M. That arithmetic leaves out the Series A preferred. There were 18,649,567 shares outstanding at Jun 30, each with a $12.00 stated value, and in a liquidation or a Deemed Liquidation Event, which includes a sale of the company, they receive the greater of their Accrued Value or their as-converted value before any payment to the common. Dividends accrue at 12% when paid in kind (10% in cash), compounding each Jun 1 and Dec 1, and so far they have been accrued, not paid: the six-month cash flow statement lists the $9.6M of dividends and accretion as noncash.

On our math the Accrued Value was ~$12.42 a share at Jun 30, a claim of ~$232M that already exceeds the cash. Counting it, the market pays ~$228M for the operating business, ~34x trailing revenue.

Time works against the common from both sides. The claim grows by ~$29M a year while the business burns ~$27M a quarter, and after Mar 16, 2031 holders can put their shares back at Accrued Value, ~$401M on our estimate, with the certificate directing the company to apply all of its assets to the redemption. Merlin can call the preferred, but only at 150% of Accrued Value in the first year, stepping down ten points a year to par after year five.

The Oct 15 reset hardens the ceiling. By our count Oct 15 is the 21st trading day after Sep 16, the six-month mark, and on that day the preferred's conversion price and the strikes on the PIPE and May warrants reset to the greater of the 20-day VWAP and $5.00. The nine sessions from Sep 17 to Sep 29 averaged a daily VWAP of ~$1.88, so the stock would need to average more than $7.50 over the remaining eleven for the floor not to bind. The warrants keep their aggregate exercise price constant, so share counts scale up: 36,116,246 PIPE warrants cover 48.2M shares after the reset, and the May warrants' 4.0M become 5.3M, a figure Merlin already registered in its May resale prospectus. The preferred converts at Accrued Value over $5.00, or ~47.9M shares. Above $5, the fully diluted count is ~214.6M shares; below it, the common sits behind a claim it cannot convert away.

Two more wrinkles. The warrant liability of $130.1M at Jun 30 was marked with the stock at $5.69; at $1.78 and a $5.00 strike our Black-Scholes range is ~$30.0M to ~$48.9M, implying a non-cash Q3 gain of ~$81.2M to ~$100.2M. That could swing Q3 to a GAAP profit against a consensus loss of $0.26 a share without changing anything in the waterfall. And the largest preferred holder gains from down rounds: Alyeska held 9,803,922 of the shares at closing (45.2% of the class) and took the whole May PIPE, whose pricing reset the conversion price to $6.67 and produced the $60.8M deemed dividend in Q2.

Merlin sells autonomy for aircraft that already exist: the Merlin Pilot, a retrofit system built to take over flying duties on large military and cargo planes. Revenue today is almost all US government development work, $2.1M of Q2's $2.2M (97.3%). The anchor is a USSOCOM IDIQ for C-130J autonomy with a ceiling of up to $105M, on which Merlin is the sole prime. The program completed its critical design review in June; next come integration on an initial C-130J, then ground and flight tests, and the CEO expects “meaningful revenue in 2027” from that phase. None of it is booked yet: RPO was $0.6M at Jun 30.

The development work has been fixed-price and loss-making. Q2 carried a new $0.5M contract-loss provision after a $2.5M favorable adjustment in Q1, and FY2025 gross margin was −21.6% against the 33% the SPAC projections assumed. The commercial path narrowed on Sep 9, when Merlin withdrew its small-aircraft supplemental type certificate application with New Zealand's regulator to pursue a phased large-aircraft strategy, four months after its Q1 release said it was targeting the first certified, fully automated takeoff-to-touchdown flight on a fixed-wing aircraft. The IAI and World Star Aviation agreements are non-binding memoranda of understanding.

Competition. The closest rival is private. Reliable Robotics, which is automating the Cessna Caravan, raised $160M in April, holds a $17.4M US Air Force contract and had its FAA certification plan accepted in 2023. On valuation, MRLN's claims-adjusted EV of ~10.9x consensus 2027 sales sits between defense-technology names (Kratos 3.1x, Ondas 2.9x, Karman 5.5x EV to 2027E sales) and the eVTOL developers (Joby 19.8x, Archer 27.7x). The difference is funding: Joby and Archer held $2.3B and $1.6B of cash and short-term investments at Jun 30, while Merlin's cash is smaller than the claim ahead of its common.

A DCF would only restate our revenue guess: Merlin has negative gross profit, negative operating cash flow and a senior claim that grows every quarter, so we value the common on a claims waterfall at a Sep 2027 horizon.

Start with what $1.78 requires. After a base-case raise, the common holds its price in Sep 2027 only if the business is worth ~$438M, or ~7.2x consensus FY2028E revenue of $60.6M. That consensus already assumes revenue grows more than sevenfold from 2026's $8.2M, a ramp Merlin has so far missed.

Our base case assumes burn of ~$27M a quarter (Q2 operating cash outflow plus capex was $28.9M, and management guided H2 adjusted EBITDA flat to slightly better than H1), which leaves ~$49M by mid-2027 without new money. We assume a $100M raise at $1.40, a 21% discount to the last close, for ~71.4M new shares plus 3.0M shares of stock compensation: ~175.5M shares and ~$143M of cash by Sep 2027, against a preferred claim of ~$268M. We apply 8x EV/sales to FY2028E revenue of $42M, 31% below consensus after two misses: an EV of $336M and equity after the preferred of ~$211M, or $1.20 a share.

Implied value per share, Sep 2027 = (FY2028E revenue × EV/Sales + cash − preferred claim) ÷ 175.5M shares, holding the base-case raise constant and flooring at zero.

Scenarios, 12 months out:

Probability-weighted value: $1.46 (−18% vs the reference price).

CEO Matt George owns 15,420,961 shares (15.3% of shares outstanding) per his Sep 16 Form 4, so his exposure runs with the common. CFO Ryan Carrithers told the Q2 call that the cash funds growth “into fiscal 2028.” No officer or director has traded MRLN shares in the open market since the listing; the Sep 16 filings show shares withheld for taxes on vesting RSUs at the $2.21 close. The 10-Q discloses material weaknesses in controls over non-routine and complex transactions (including warrant liabilities and de-SPAC equity accounting), segregation of duties and IT general controls: the same instruments that drive the waterfall. The preferred also carries protective provisions while at least 20% of the original issue is outstanding; 85.9% still is.

The risks to a SELL are real and mostly short-dated: a crowded short, a heavy call book and a Q3 headline that may read as a beat. The risks to the common are slower and larger: the price of the next raise and the claim compounding ahead of it.

Positioning is crowded on both sides. Short interest reached 10.5M shares on Sep 15 (10.4% of shares outstanding, 8.7 days to cover) with borrow near 15%, while options open interest leans hard to calls: 103,767 call contracts against 10,339 puts, a put/call ratio of 0.10. The largest call strike is $10 (37,907 contracts) and the Jan 15, 2027 expiry holds 58,900 calls. Implied volatility near 105% (IV rank 21) prices large moves both ways, and max pain for the Oct 16 expiry is $2.50.

The Street is uniformly positive and trimming. Six firms have initiated since April, all at Buy-equivalent ratings (6 Buy, 0 Hold, 0 Sell), and FactSet's mean target was $8.58 on Sep 25. Three have already cut: Roth to $10 (it was $25 in April), TD Cowen to $8 from $11 and Cantor to $9 from $11.

What would move us to HOLD. Evidence that the waterfall is shrinking or the revenue is arriving: a C-130J production task order that lifts RPO above ~$25M; an exchange or repurchase of the preferred below its Accrued Value; a financing at or above $3.00; or two straight quarters at or above revenue consensus with positive gross profit.

What would move us to a stronger SELL. A raise below $1.00, a going-concern qualification, a Nasdaq bid-price deficiency notice, another contract-loss provision, or H2 revenue below the $4M low end of guidance. Any of these would push the base case toward the bear case's ~$0.50.

Merlin has a real program and a real market: a sole-prime C-130J autonomy IDIQ and a retrofit product aimed at the large aircraft that carry cargo. The stock is a different matter. The screen's below-cash reading disappears once the Series A preferred is counted, leaving ~$228M of enterprise value for $6.8M of trailing revenue, and the claim compounds at 12% while the cash burns at ~$27M a quarter. The Oct 15 reset caps the upside at the $5.00 line where the share count roughly doubles, and a raise in H1 2027 is likely to be priced off a sub-$2 stock.

The case against us is squeeze-driven and program-driven: 10.4% short interest and a 10:1 call skew can produce violent rallies, a Q3 GAAP profit from warrant marks could spark one, and a C-130J production award would pull revenue forward. None of these changes the order in which the claims are paid.